EDGE MUTUAL INSURANCE COMPANY
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2016
DECEMBER 31, 2016
CONTENTS
Page
Management Responsibility for Financial Reporting
1
Independent Auditors' Report
2
Financial Statements
Financial Position
3
Statement of Comprehensive Income
4
Statement of Policyholders' Equity
4
Statement of Cash Flows
5
Explanatory Financial Notes
Nature of Operations and Summary of Significant Accounting Policies
Critical Accounting Estimates and Judgements
Financial Instrument Classification
Investment Information
Property, Plant and Equipment and Intangible Assets
Operating Lease Commitment
Insurance Contracts
Income Taxes
Gross Claims and Adjustment Expense
Other Operating and Administrative Expenses
Investment Income
Related Party Transactions
Capital Management
Financial Instrument and Insurance Risk Management
Retirement Benefits
Comparative Figures
6
11
11
12
14
15
15
20
20
20
21
21
22
22
26
26
MANAGEMENT RESPONSIBILITY FOR FINANCIAL REPORTING
DECEMBER 31, 2016
The accompanying financial statements and all other information contained in this annual report are the
responsibility of the management of Edge Mutual Insurance Company. The financial statements have
been prepared by management in accordance with International Financial Reporting Standards including
the accounting requirements of the Financial Services Commission of Ontario and have been approved
by the Board of Directors.
Preparation of financial information is an integral part of management's broader responsibilities for the
ongoing operations of Edge Mutual Insurance Company, which includes adherence by all employees to
the company's Code of Conduct. Management maintains a system of internal accounting controls to
provide reasonable assurance that transactions are accurately recorded on a timely basis, are properly
approved and result in reliable financial information. Such information also includes data based on
management's best estimates and judgements.
The annual financial statements are reviewed and approved by the Audit Committee and the Board of
Directors. In addition, the Audit Committee meets periodically with financial officers of Edge Mutual
Insurance Company and the external auditors, and reports to the Board of Directors thereon.
The accompanying financial statements have been audited by Graham Mathew Professional Corporation,
authorized to practise public accounting by the Chartered Professional Accountants of Ontario, who are
engaged by the Board of Directors and whose appointment was ratified at the annual meeting of the
policyholders. The auditors have access to the Audit Committee, without management present, to discuss
the results of their work. Their report dated January 27, 2017 expresses their unqualified opinion on the
Company's 2016 financial statements.
Ruth Donkersgoed, CIP
President/CEO
Mike Fortuna
Treasurer/CFO
1.
INDEPENDENT AUDITORS' REPORT
To the Policyholders of
Edge Mutual Insurance Company
We have audited the accompanying financial statements of Edge Mutual Insurance Company, which comprise the
statement of financial position as at December 31, 2016, and the statements of comprehensive income, policyholders'
equity and cash flows for the year then ended, and a summary of significant accounting policies and other
explanatory information.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit
in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on our judgement, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we
consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of Edge Mutual
Insurance Company as at December 31, 2016, and its financial performance and cash flows for the year then ended
in accordance with International Financial Reporting Standards.
Cambridge, Ontario
January 27, 2017
CHARTERED ACCOUNTANTS, authorized to practise public
accounting by the Chartered Professional Accountants of Ontario
FINANCIAL POSITION
DECEMBER 31, 2016
2016
$
2015
$
ASSETS
Cash and investments (notes 3 and 4)
Due from policyholders
Due from Facility Association
Investment income accrued (note 3)
Due from reinsurer (note 7)
Reinsurers' share of provision for
unpaid claims (note 7)
Income taxes recoverable (note 8)
Deferred policy acquisition expenses (note 7)
Deferred income taxes
Property, plant and equipment and intangible assets (note 5)
36,131,253
6,498,412
336,656
136,599
8,449
32,875,895
6,420,674
337,160
258,112
60,408
12,608,350
2,167,017
92,900
4,054,324
20,526,404
38,799
2,099,251
48,780
4,064,255
62,033,960
66,729,738
24,392,849
12,159,828
513,910
224,513
220,985
30,560,570
11,763,230
836,204
37,512,085
43,381,046
24,521,875
23,348,692
62,033,960
66,729,738
LIABILITIES
Provision for unpaid claims (note 7)
Unearned premiums (note 7)
Accounts payable and accrued liabilities
Income taxes payable (note 8)
Payable to Facility Association
221,042
POLICYHOLDERS' EQUITY
Policyholders' equity (page 4)
APPROVED BY THE BOARD:
Les Frayne, Chair
Arnold Rumph, First Vice-Chair
The explanatory financial notes form an integral part of these financial statements.
3.
STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2016
2015
$
2016
$
Gross premiums written
24,334,319
23,452,551
3,981,841
396,598
3,513,643
816,351
4,378,439
4,329,994
Net premiums earned
19,955,880
19,122,557
Service charge revenue
231,853
193,832
20,187,733
19,316,389
14,441,534
( 2,529,337)
12,538,366
( 1,274,841)
11,912,197
11,263,525
4,624,876
3,701,657
4,370,203
3,192,677
8,326,533
7,562,880
Deduct
Reinsurance premiums
Increase in reserve for unearned premiums
Net underwriting revenue
Direct losses incurred
Gross claims and adjusting expenses (note 9)
Reinsurers' share of claims and adjusting expenses
Expenses
Fees, commissions and other acquisition expenses
Other operating and administrative expenses (note 10)
Underwriting income (loss)
(
50,997)
489,984
Investment income (note 11)
1,469,373
146,431
Income before income taxes
1,418,376
636,415
Income tax expense (note 8)
Current expense
Deferred expense (reduction)
Net income, being total comprehensive income for year
(
289,313)
44,120
(
(
75,704)
19,920)
(
245,193)
(
95,624)
1,173,183
540,791
STATEMENT OF POLICYHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2016
Balance at beginning of year
Net income, being total comprehensive income for year
23,348,692
1,173,183
22,807,901
540,791
Balance at end of year
24,521,875
23,348,692
The explanatory financial notes form an integral part of these financial statements.
4.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2016
2015
$
2016
$
Cash flows from operating activities:
Net income, being total comprehensive income for year
Items not involving cash:
Amortization of bond discounts
Depreciation and amortization
Deferred income taxes
Gain (loss) on disposal of investments
Unrealized losses (gains) on investments
Net change in non-cash working capital
balances relating to operations:
Amounts receivable
Reinsurers' share of provision for unpaid claims
Deferred policy acquisition expenses
Accounts payable and accrued liabilities
Payable to Facility Association
Income taxes payable
Provision for unpaid claims
Unearned premiums
1,173,183
146,091
386,854
(
44,120)
302,169
( 1,035,184)
(
928,993
(
(
(
(
96,238
7,918,054
67,766)
322,294)
57)
263,312
6,167,721)
396,598
3,045,357
Cash flows from investment activities:
Sale of investments
Purchase of investments
Net additions to property plant and equipment and
intangible assets
540,791
155,609
226,082
19,920
225,578)
829,243
1,546,067
(
(
(
(
(
524,673)
3,357,149
151,629)
152,629
5,563)
141,708)
4,180,628)
816,351
867,995
7,685,674
( 8,607,359)
6,575,876
( 5,337,612)
(
376,923)
( 3,315,445)
( 1,298,608)
( 2,077,181)
Net increase (decrease) in cash
1,746,749
Cash position, beginning of year
2,427,605
3,636,791
Cash position, end of year (note 3)
4,174,354
2,427,605
The explanatory financial notes form an integral part of these financial statements.
( 1,209,186)
5.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
1. Nature of Operations and Summary of Significant Accounting Policies
(a)
Reporting entity
Edge Mutual Insurance Company (the Company) is incorporated under the laws of Ontario and is subject to
the Ontario Insurance Act. It is licensed to write property, liability, automobile and farmers' accident
insurance in Ontario. The Company's head office is located at 103 Wellington Street South, Drayton,
Ontario.
The Company is subject to rate regulation in the automobile business that it writes. Before automobile
insurance rates can be changed, a rate filing is prepared as a combined filing for most Ontario Farm Mutuals
by the Farm Mutual Reinsurance Plan Inc. The rate filing must include actuarial justification for rate
increases or decreases. All rate filings are approved or denied by the Financial Services Commission of
Ontario. Rate regulation may affect the automobile revenues that are earned by the Company. The actual
impact of rate regulation would depend on the competitive environment at the time.
These financial statements have been authorized for issue by the Board of Directors on January 27, 2017.
(b) Basis of presentation
These financial statements have been prepared in accordance with International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards Board (the IASB).
These financial statements were prepared on a historical cost basis except for those financial assets and
financial liabilities that have been measured at fair value.
The Company's functional and presentation currency is the Canadian dollar. The financial statements are
presented in Canadian dollars.
The preparation of financial statements in compliance with IFRS requires management to make certain
critical accounting estimates. It also requires management to exercise judgement in applying the Company's
accounting policies. The areas involving a higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the financial statements are disclosed in note 2.
(c)
Insurance contracts
In accordance with IFRS 4, Insurance Contracts, the Company has continued to apply the accounting
policies it applied in accordance with pre-changeover Canadian GAAP.
Balances arising from insurance contracts primarily include unearned premiums, provisions for unpaid
claims and adjustment expenses, the reinsurers' share of unpaid claims and adjustment expenses, deferred
policy acquisition expenses, and salvage and subrogation recoverable.
(i)
Premiums and unearned premiums
Premiums written comprise the premiums on contracts incepting in the financial year. Premiums
written are stated gross of commissions payable to brokers and exclusive of taxes levied on premiums.
The Company earns premium income evenly over the term of the insurance policy generally using the
pro rata method. The portion of the premium related to the unexpired portion of the policy at the end
of the fiscal year is reflected in unearned premiums.
6.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
(c)
Insurance contracts (continued)
(ii) Deferred policy acquisition expenses
Acquisition costs are comprised primarily of brokers' commissions. These costs are deferred and
amortized over the terms of the related policies to the extent that they are considered to be recoverable
from unearned premiums, after considering the related anticipated claims and expenses.
(iii) Provisions for unpaid claims and adjustment expenses
Individual loss estimates are provided on each claim reported. In addition, provisions are made for
adjustment expenses, changes in reported claims and for claims incurred but not reported, based on
past experience and business in force. The estimates are regularly reviewed and updated, and any
resulting adjustments are included in current income.
Claim liabilities are carried on an undiscounted basis.
(iv) Liability adequacy test
As required, the Company performs a liability adequacy test on its insurance liabilities less deferred
policy acquisition expenses to ensure the carrying value is adequate, using current estimates of future
cash flows, taking into account the relevant investment return. If that assessment shows that the
carrying amount of the liabilities is inadequate, any deficiency is recognized as an expense to the
statement of comprehensive income initially by writing off the deferred policy acquisition expense and
subsequently by recognizing an additional claims liability for claims provisions.
(v)
Reinsurers' share of provisions for unpaid claims and adjustment expenses
The Company enters into reinsurance contracts in the normal course of business in order to limit
potential losses arising from certain exposures. Reinsurance liabilities, comprised of premiums
payable for the purchase of reinsurance contracts, are included in accounts payable and accrued
liabilities and are recognized as an expense when due.
Expected reinsurance recoveries on unpaid claims and adjustment expenses are recognized as assets at
the same time and using principles consistent with the Company's method for establishing the related
liability.
Reinsurance premiums ceded and reinsurance recoveries on losses incurred are recorded as reductions
of the respective income and expense accounts. A contingent liability exists with respect to
reinsurance ceded which could become a liability of the Company in the event that the reinsurer might
be unable to meet its obligation under the reinsurance agreements. The Company ascertained that no
provision is necessary at December 31 for doubtful collection of reinsurance recoveries.
7.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
(c)
Insurance contracts (continued)
(vi) Salvage and subrogation recoverable
In the normal course of business, the Company obtains the ownership of damaged property, which
they resell to various salvage operations. Unsold property is valued at its estimated net realizable
value.
Where the Company indemnifies policyholders against a liability claim, it acquires rights to subrogate
its claim against other parties. These claims are reflected at amounts expected to be received from the
subrogated parties net of related costs.
(vii) Refund from premium
Under the discretion of the Board of Directors, the Company may declare a refund to its policyholders
based on the premiums paid in the fiscal period. This refund is recognized as a reduction of revenue in
the period for which it is declared. No refund was declared in fiscal 2016 or 2015.
(d) Structured settlements, Fire Mutuals Guarantee Fund and financial guarantee contracts
The Company enters into annuity agreements with various life insurance companies to provide for fixed and
recurring payments to claimants. Under such arrangements, the Company's liability to its claimants is
substantially transferred, although the Company remains exposed to the credit risk that life insurers fail to
fulfill their obligations.
The Company is a member of the Fire Mutuals Guarantee Fund ("the Fund"). The Fund was established to
provide payment of outstanding policyholders' claims if a member company becomes insolvent. As a result,
the Company may be required to contribute assets to their proportionate share in meeting this objective.
These exposures represent financial guarantee contracts. The Company accounts for financial guarantee
contracts in accordance with IFRS 4, Insurance Contracts.
(e)
Financial instruments
The Company classifies its financial instruments into one of the following categories based on the purpose
for which the asset was acquired or liability incurred. All transactions related to financial instruments are
recorded on a trade date basis. The Company's accounting policy for each category is as follows:
(i)
Held-to-maturity financial assets
If the Company has the positive intent and ability to hold debt securities to maturity, then such
financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognized
initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition
held-to-maturity financial assets are measured at amortized cost using the effective interest method,
less any impairment losses. Any sale or reclassification of a more than insignificant amount of held-tomaturity investments not close to their maturity would result in the reclassification of all held-tomaturity investments as fair value through profit and loss and prevent the Company from classifying
investment securities as held-to-maturity for the current and the following two financial years.
8.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
(e)
Financial instruments (continued)
(ii) Financial assets at fair value through profit or loss
A financial asset is classified as fair value through profit or loss if it is classified as held-for-trading or
is designated as such upon initial recognition. Financial assets are designated as fair value through
profit or loss if the Company manages such investments and makes purchases and sale decisions based
on their fair value in accordance with the Company’s documented risk management or investment
strategy. Upon initial recognition attributable transaction costs are recognized in profit or loss as
incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes
therein are recognized in profit or loss.
(iii) Loans and receivables
These assets are non-derivative financial assets resulting from the delivery of cash or other assets by a
lender to a borrower in return for a promise to repay on a specified date or dates, or on demand. They
are initially recognized at fair value plus transaction costs that are directly attributable to their
acquisition or issue and subsequently carried at amortized cost, using the effective interest rate
method, less any impairment losses.
Impairment provisions are recognized when there is objective evidence (such as significant financial
difficulties on the part of the counterparty or default or significant delay in payment) that the Company
will be unable to collect all of the amounts due under the terms receivable, the amount of such a
provision being the difference between the net carrying amount and the present value of the future
expected cash flows associated with the impaired receivable. For amounts due from policyholders and
reinsurers, which are reported net, such provisions are recorded in a separate allowance account with
the loss being recognized in net income. On confirmation that the amounts receivable will not be
collectable, the gross carrying value of the asset is written off against the associated provision.
(iv) Other financial liabilities
Other financial liabilities include all financial liabilities and comprise accounts payable, and other
short-term monetary liabilities. These liabilities are initially recognized at fair value net of any
transaction costs directly attributable to the issuance of the instrument and subsequently carried at
amortized cost using the effective interest rate method, which ensures that any interest expense over
the period to repayment is at a constant rate on the balance of the liability carried in the statement of
financial position. Interest expense in this context includes initial transaction costs and premiums
payable on redemption, as well as any interest or coupon payable while the liability is outstanding.
(f)
Facility Association
As a member of the Facility Association, the Company records its proportionate share of the Association's
revenue, expenses, unearned premiums and provision for unpaid claims.
(g)
Income taxes
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net
income except to the extent that it relates to a business combination, or items recognized directly in
policyholders' equity.
Current income taxes are recognized for the estimated income taxes payable or receivable on taxable
income or loss for the current year and any adjustment to income taxes payable in respect of previous years.
Current income taxes are determined using tax rates and tax laws that have been enacted or substantively
enacted by the year-end date.
9.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
(g)
Income taxes (continued)
Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs
from its tax base. The amount is determined using tax rates and tax laws that have been enacted or
substantively enacted by the year-end date and are expected to apply when the liabilities / (assets) are
settled / (recovered).
(h)
Pension plan
The Company participates in a multi-employer defined benefit pension plan, however, sufficient
information is not available to use defined benefit accounting. Therefore, the Company accounts for the
plan as if it were a defined contribution plan, recognizing contributions as an expense in the year to which
they relate.
(i)
Leased assets
Where substantially all of the risks and rewards incidental to ownership of a leased asset have been
transferred to the Company (a "finance lease"), the asset is treated as if it had been purchased outright. The
amount initially recognized as an asset is the lower of the fair value of the leased property and the present
value of the minimum lease payments payable over the term of the lease. The corresponding lease
commitment is shown as a liability. Lease payments are analyzed between capital and interest. The interest
element is charged to the statement of comprehensive income over the period of the lease and is calculated
so that it represents a constant proportion of the lease liability. The capital element reduces the balance
owed to the lessor.
Where substantially all of the risks and rewards incidental to ownership are not transferred to the Company
(an "operating lease"), the total rentals payable under the lease are charged to the statement of
comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives
is recognized as a reduction of the rental expense over the lease term on a straight-line basis.
(j)
Standards, amendments and interpretations not yet effective
Certain new standards, amendments and interpretations have been published that are mandatory for the
Company's accounting periods beginning on or after January 1, 2017 or later periods that the Company has
decided not to early adopt.
The company has not yet determined the extent of the impact of the following new standards, interpretations
and amendments, which have not been applied in these financial statements:
•
IFRS 9 Financial Instruments is part of the IASB's wider project to replace IAS 39 'Financial
Instruments: Recognition and Measurement'. IFRS 9 retains but simplifies the mixed measurement
model and establishes three primary measurement categories for financial assets: amortized cost, fair
value through profit or loss, and fair value through other comprehensive income. The basis of
classification depends on the entity's business model and the contractual cash flow characteristics of
the financial asset. The standard is effective for annual periods beginning on or after January 1, 2018.
•
IFRS 16 Leases supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a
Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating the Substance of Transactions
involving the Legal Form of a Lease. It eliminates the distinction between operating and finance leases
from the perspective of the lessee. All contracts that meet the definition of a lease will be recorded in
the statement of financial position with a "right of use" asset and a corresponding liability, calculated
using the interest rate inherent in the lease. The asset is subsequently accounted for as property, plant
and equipment. The effective date for IFRS 16 is January 1, 2019.
10.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
2. Critical Accounting Estimates and Judgements
The preparation of these financial statements in conformity with IFRS requires management to make certain
critical estimates. It also requires management to exercise judgement in applying the Company's accounting
policies. The areas involving critical judgements and estimates in applying accounting policies that have the most
significant risk of causing material adjustment to the carrying amounts of assets and liabilities recognized in the
financial statements within the next financial year include primarily the calculation and determination of unpaid
claims and the related reinsurers' share (note 7).
3. Financial Instrument Classification
The carrying amount of the Company’s financial instruments by classification is as follows:
December 31, 2016
Cash
Investments (note 4)
Due from policyholders
and reinsurer
Investment income
accrued
Accounts payable and
accrued liabilities
Fair value
through profit
and loss
$
4,174,354
12,200,514
Held to
Maturity
$
Other
financial
liabilities
$
Loans and
receivables
$
Total
4,174,354
31,956,899
19,756,385
16,374,868
19,756,385
2,427,605
10,753,397
19,694,893
6,506,861
6,506,861
136,599
136,599
6,643,460
(
513,910)
(
513,910)
(
513,910)
42,260,803
December 31, 2015
Cash
Investments (note 4)
Due from policyholders
and reinsurer
Investment income
accrued
Accounts payable and
accrued liabilities
13,181,002
19,694,893
2,427,605
30,448,290
6,481,082
6,481,082
258,112
258,112
6,739,194
(
836,204)
(
836,204)
(
836,204)
38,778,885
All fair value through profit and loss investments are classified as held for trading.
11.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
4. Investment Information
The estimated fair values of cash and investments as at December 31 were as follows:
Cash
Bonds, debentures, guaranteed investment
certificates and Farm Mutual guarantee fund
Equities
Pooled funds
2016
$
2015
$
4,174,354
2,427,605
19,756,385
3,233,450
8,967,064
19,694,893
5,076,645
5,676,752
36,131,253
32,875,895
Maturity profile of bonds, debentures and guaranteed investment certificates held is as follows:
Within 1 year
2 to 5 years
6 to 10 years
Over 10 years
Fair value
December 31, 2016
Percent of Total
2,752,641
14 %
17,003,744
86 %
NIL
0%
NIL
0%
19,756,385
December 31, 2015
Percent of Total
735,000
4%
18,959,893
96 %
NIL
0%
NIL
0%
19,694,893
The effective investment yield for the year is 4.6% (0.48% for 2015).
The following table provides an analysis of the investments that are measured subsequent to initial recognition at
fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
•
Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for
identical assets or liabilities that the entity can access at the measurement date;
•
Level 2 fair value measurements are those derived from inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i e derived
from prices); and
•
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the
asset or liability that are not based on observable market data (unobservable inputs).
On December 31, 2016 the company held only Level 1 and 2 investments.
December 31, 2016
Level 1
$
Guaranteed investment certificates
Bonds
Equities
Mutual funds
Other investments
4,995,276
14,704,861
3,233,450
8,967,064
Total assets measured at fair value
31,900,651
Level 2
$
Level 3
$
4,995,276
14,704,861
3,233,450
8,967,064
56,248
56,248
56,248
Total
$
NIL
31,956,899
12.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
4. Investment Information (Continued)
December 31, 2015
Level 1
$
Level 2
$
Guaranteed investment certificates
Bonds
Equities
Mutual funds
Other investments
4,780,276
14,860,631
5,076,645
5,676,752
Total assets measured at fair value
30,394,304
Level 3
$
Total
$
4,780,276
14,860,631
5,076,645
5,676,752
53,986
53,986
53,986
NIL
30,448,290
There were no transfers between Level 1 and Level 2 for the years ended December 31, 2016 and 2015.
The following table provides cost and fair value information of investments by type of security and issuer. The
maximum exposure to credit risk would be the fair value as shown below.
Cost
2016
Fair Value
Cost
2015
Fair Value
Guaranteed Investment
Certificates
4,995,276
4,995,276
4,780,276
4,780,276
Bonds issued by
Federal
Provincial
Municipal
Corporate A or better
4,032,511
3,695,824
6,976,526
4,032,511
3,695,824
6,976,526
701,911
3,944,768
4,232,193
5,981,758
701,911
3,944,768
4,232,193
5,981,759
14,704,861
14,704,861
14,860,630
14,860,631
2,076,116
469,845
2,531,453
701,997
4,314,579
850,765
3,835,288
1,241,357
2,545,961
3,233,450
5,165,344
5,076,645
5,923,416
2,779,177
5,885,272
3,081,792
5,271,190
402,764
5,309,253
367,499
8,702,593
8,967,064
5,673,954
5,676,752
56,248
56,248
53,986
53,986
31,004,939
31,956,899
30,534,190
30,448,290
Equity investments
Canadian
United States
Pooled funds
Canadian fixed income
Canadian and United States equity
Other investments
Fire Mutuals guarantee fund
13.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
5. Property, Plant and Equipment and Intangible Assets
Property, plant and equipment is initially recorded at cost and subsequently measured at cost less accumulated
depreciation and accumulated impairment losses, with the exception of land which is not depreciated.
Depreciation is recognized in net income and is provided over the estimated useful lives of the assets using the
straight-line method (years) or declining-balance method (percentage).
Intangible assets consist of computer software which are not integral to the computer hardware owned by the
company. Software is initially recorded at cost and subsequently measured at cost less accumulated amortization
and accumulated impairment losses. The amortization expense is included within the other operating and
administrative expenses in the statement of comprehensive income and is provided over the estimated useful life
of the asset.
Depreciation
rate
Land
Buildings
Sign
Parking lot
Computer hardware
Furniture and fixtures
Vehicles
Computer software
5%
20%
10 years
3 years
20%
40-50%
5 years
Depreciation
rate
Land
Buildings
Sign
Parking lot
Computer hardware
Furniture and fixtures
Vehicles
Computer software
5%
20%
10 years
3 years
20%
40-50%
5 years
2016
Cost
Accumulated
Depreciation
Net Book Value
110,000
4,181,277
53,020
44,099
116,464
491,171
65,134
1,008,185
676,086
35,646
44,099
102,333
248,286
47,370
861,206
110,000
3,505,191
17,374
NIL
14,131
242,885
17,764
146,979
6,069,350
2,015,026
4,054,324
2015
Cost
Accumulated
Depreciation
Net Book Value
110,000
3,842,733
53,020
44,099
101,182
468,074
65,134
1,008,185
491,602
31,303
44,099
81,450
187,565
31,505
760,648
110,000
3,351,131
21,717
NIL
19,732
280,509
33,629
247,537
5,692,427
1,628,172
4,064,255
The unamortized cost of capital assets available to reduce net income for income tax purposes amounts to
approximately $3,755,000 ($3,698,000 in 2015).
14.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
6. Operating Lease Commitment
The Company has entered into an operating lease agreement whereby it is obligated to rent computer hardware
equipment for 48 months at a monthly cost of $9,344 beginning December 2015.
2016
$
7. Insurance Contracts
2015
$
Due From Reinsurers
Balance, beginning of year
Submitted to reinsurer
Paid to (received from) reinsurer
(
Balance, end of year
60,408
9,831,580
9,883,539)
(
8,449
65,191
4,811,433
4,816,216)
60,408
All of the above amounts are expected to be settled within one year. At year-end, the company reviewed the
amounts owing from its reinsurer and determined that no allowance is necessary
Reinsurers' Share of Provision For Unpaid Claims
Balance, beginning of year
New claims reserve
Change in prior years reserve
Submitted to reinsurer
20,526,404
3,958,374
( 21,708,008)
9,831,580
23,883,553
4,413,803
( 12,582,385)
4,811,433
Balance, end of year
12,608,350
20,526,404
Expected settlement
Within one year
More than one year
771,106
11,837,244
651,857
19,874,547
12,608,350
20,526,404
Deferred Policy Acquisition Expenses
Balance, beginning of year
Acquisition costs incurred
Expense recognized as a result of liability adequacy tests
Expensed during the year
Balance, end of year
(
2,099,251
4,374,772
NIL
4,307,006)
2,167,017
(
1,947,622
4,214,184
NIL
4,062,555)
2,099,251
Deferred policy acquisition expenses will be recognized as an expense within one year.
15.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
2016
$
7. Insurance Contracts (Continued)
2015
$
Unearned Premiums (UEP)
11,763,230
Balance, beginning of year
24,334,319
( 23,937,721)
Premiums written
Premiums earned during year
Changes in UEP recognized in income
Balance, end of year
10,946,879
23,452,551
( 22,636,200)
396,598
816,351
12,159,828
11,763,230
Insurance Contract Provisions and Related Reinsurance Assets
The following is a summary of the insurance contract provisions and related reinsurance assets:
December 31, 2016
Outstanding claims provision
Long settlement term
Short settlement term
Facility Association and other residual pools
Provisions for claims incurred but not reported
Balance, end of year
Gross
$
Re-insurance
$
Net
$
11,434,227
3,203,156
384,944
6,360,722
771,106
5,073,505
2,432,050
384,944
15,022,327
9,370,522
7,131,828
5,476,522
7,890,499
3,894,000
24,392,849
12,608,350
11,784,499
18,877,635
2,949,745
373,356
14,988,713
651,857
3,888,922
2,297,888
373,356
22,200,736
8,359,834
15,640,570
4,885,834
6,560,166
3,474,000
30,560,570
20,526,404
10,034,166
December 31, 2015
Outstanding claims provision
Long settlement term
Short settlement term
Facility Association and other residual pools
Provisions for claims incurred but not reported, net
Balance, end of year
Comments and Assumptions For Specific Claims Categories
The ultimate cost of long settlement general liability claims are difficult to predict for several reasons. Claims
may not be reported until many years after a policy expires. Changes in the legal environment have created
further complications. Court decisions and federal and provincial legislation may dramatically increase the
liability between the time a policy is written and associated claims are ultimately resolved. For example, liability
for exposure to toxic substances and environmental impairment, which did not appear likely or even exist when
the policies were written, has been imposed by legislators and judicial interpretation. Tort liability has been
expanded by some jurisdictions to cover defective workmanship. Provisions for such difficult-to-estimate
liabilities are established by examining the facts of tendered claims and adjusted in the aggregate for ultimate loss
expectations based upon historical experience patterns and current socioeconomic trends.
16.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
7. Insurance Contracts (Continued)
Comments and Assumptions For Specific Claims Categories (Continued)
The Company must participate in industry automobile residual pools of business, and recognize a share of this
business based on its automobile market share. The Company records its share of the liabilities provided by the
actuaries of the pools.
Claims and Adjustment Expenses
Changes in claim liabilities recorded in the statement of financial position for the years ended December 31,
2016 and 2015 and their impact on claims and adjustment expenses for the two years are as follows:
2016
$
Unpaid claim liabilities, beginning of year, net of reinsurance
Increase (decrease) in estimated losses and expenses, for
losses occurring in prior years
Provision for losses and expenses on claims occurring
in the current year
Payment on claims:
Current year
Prior years
2015
$
10,034,166
(
205,284)
10,857,645
(
12,117,481
(
(
6,859,519)
3,302,345)
232,268)
11,495,793
(
(
7,203,352)
4,883,652)
Unpaid claim liabilities, end of year, net of reinsurance
Reinsurers' share and subrogation recoverable
11,784,499
12,608,350
10,034,166
20,526,404
Unpaid gross claims, end of year
24,392,849
30,560,570
The change in estimate of losses occurring in prior years is due to changes arising from new information
received.
Claim Development
The estimation of claim development involves assessing the future behaviour of claims, taking into consideration
the consistency of the Company's claim handling procedures, the amount of information available, the
characteristics of the line of business from which the claim arises and historical delays in reporting claims. In
general, the longer the term required for the settlement of a group of claims the more variable the estimates. Short
settlement term claims are those which are expected to be substantially paid within a year of being reported.
The tables that follow present the development of claims payments and the estimated ultimate cost of claims for
the claim years 2007 to 2016. The upper half of the tables show the cumulative amounts paid or estimated to be
paid during successive years related to each claim year. The original estimates will be increased or decreased, as
more information becomes known about the original claims and overall claim frequency and severity.
In 2011, the year of adoption of IFRS, only information from periods beginning on or after January 1, 2007 was
required to be disclosed. This is being increased in each succeeding additional year, until ten years of information
is included.
17.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
7. Insurance Contracts (Continued)
Gross Claims
2007
$
2008
$
2009
$
2010
$
2011
$
2012
$
2013
$
2014
$
2015
$
2016
$
15,953,390
Total
$
Gross estimate of
cumulative claims cost
At the end year
of claim
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Current estimate of
cumulative claims cost
Cumulative payments
6,551,278
17,457,526
7,892,233
8,908,469
12,672,107
10,831,308
13,744,615
21,747,867
15,701,141
6,604,263
6,531,366
6,366,994
6,330,709
6,502,923
6,366,920
6,362,830
6,314,202
6,314,202
16,879,742
20,162,101
19,935,100
20,635,928
20,653,275
21,247,491
21,062,418
21,105,935
7,947,679
7,603,007
8,219,141
8,282,214
8,728,974
7,517,898
7,398,211
8,331,383
8,675,240
8,362,040
7,875,041
7,883,291
7,799,914
10,456,314
9,749,761
10,009,052
9,960,423
10,093,312
9,348,586
8,628,472
8,156,808
7,886,193
12,856,032
12,809,359
11,978,422
20,797,274
21,030,698
14,917,550
6,314,202
6,314,202
21,105,935
18,302,383
7,398,211
7,118,044
7,799,914
7,739,350
10,093,312
9,886,279
7,886,193
7,366,030
11,978,422
10,476,865
21,030,698
16,292,832
14,917,550
9,364,012
15,953,390
7,224,981
2,803,552
280,167
60,564
207,033
520,163
1,501,557
4,737,866
5,553,538
8,728,409
Outstanding claims
Outstanding claims 2006 and prior
Total gross outstanding claims and claims handling expenses
24,392,849
NIL
24,392,849
18.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
7. Insurance Contracts (Continued)
Net Claims
2007
$
2008
$
2009
$
2010
$
2011
$
2012
$
2013
$
2014
$
2015
$
2016
$
Net estimate of
cumulative claims cost
At the end year of
claim
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
6,664,711
6,318,204
6,006,921
5,780,837
5,752,194
5,557,481
5,624,573
5,607,086
5,586,586
5,458,630
9,449,651
8,903,150
8,849,829
8,598,960
8,463,303
8,441,610
8,283,550
8,288,088
8,867,902
6,825,150
6,583,839
6,490,637
6,501,963
6,602,062
6,616,100
6,581,844
6,124,343
7,819,135
7,426,478
7,318,178
7,173,682
6,915,752
6,901,941
6,792,043
9,000,645
8,274,415
7,988,297
7,756,368
7,741,073
7,723,476
8,384,421
7,544,315
7,114,708
6,998,021
7,072,878
10,107,411
9,245,621
9,276,502
8,774,155
13,508,628
13,773,983
14,031,847
11,495,783
11,323,685
12,117,477
Current estimate of
cumulative claims cost
Cumulative payments
5,458,630
5,458,630
8,867,902
8,589,724
6,124,343
5,859,496
6,792,043
6,738,727
7,723,476
7,543,858
7,072,878
6,596,168
8,774,155
8,137,375
14,031,847
12,163,251
11,323,685
8,555,190
12,117,477
6,859,518
278,178
264,847
53,316
179,618
476,710
636,780
1,868,596
2,768,495
5,257,959
Outstanding claims
Outstanding claims 2006 and prior
Total net outstanding claims and claims handling expenses
Total
$
11,784,499
NIL
11,784,499
19.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
8. Income Taxes
The Company is subject to income taxes on the portion of its income derived from insuring non-farm related
risks.
Reasons for the difference between tax expense for the year and the expected income taxes based on the
statutory tax rate of 26.5% (26.5% in 2015) are as follows:
2016
2015
$
$
1,418,376
Income before income taxes
Expected taxes based on the statutory rate of 26.5%
(26.5% in 2015)
Income from insuring farm related risks
Deductible portion of claims liabilities
Other non deductible expenses
Capital cost allowance in excess of depreciation
Other non taxable income
Adjustments for under provision in prior years
(
(
Total income tax expense
375,870
96,438)
23,192
2,277
17,943
33,531)
636,415
(
(
(
(
168,650
21,975)
10,911)
1,978
22,498)
51,143)
11,603
289,313
75,704
2,028,167
63,200
59,297
269,075
546,718
31,605
55,709
181,899
115,113
159,273
96,919
72,332
22,350
1,655,675
61,850
54,335
112,254
573,966
43,741
56,541
132,057
100,648
186,143
120,616
70,496
24,355
3,701,657
3,192,677
9. Gross Claims and Adjustment Expense
Included in claims expenses were wage costs of $261,867 ($237,055 in 2015).
10. Other Operating and Administrative Expenses
Salaries and employee benefits (note 12)
Directors' remuneration
Professional fees
Occupancy
Information technology (note 6)
Inspections and investigations
Membership fees
Office overhead
Regulatory assessments
Advertising and promotion
Travel and education
Premium tax
Other
Depreciation and amortization expense of $386,854 ($226,082 in 2015) is included in the above amounts.
20.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
11. Investment Income
Interest income
Dividend and other income
Investment expense
Net realized losses
Unrealized gains
Fair value
through
profit and
loss
$
357,568
( 54,788)
( 302,169)
1,035,184
1,035,795
Fair value
through
profit and
loss
$
Interest income
Dividend and other income
Investment expense
Net realized gains
Unrealized losses
283,333
( 55,809)
225,578
( 829,243)
( 376,141)
Held to
maturity
$
Loans and
receivable
$
Other
$
432,078
432,078
Held to
maturity
$
NIL
Loans and
receivable
$
521,072
1,500
433,578
357,568
( 54,788)
( 302,169)
1,035,184
1,500
1,469,373
Other
$
521,072
1,500
NIL
2016
Total
$
1,500
2015
Total
$
522,572
283,333
( 55,809)
225,578
( 829,243)
146,431
12. Related Party Transactions
The Company entered into the following transactions with key management personnel, which are defined by
IAS 24, Related Party Disclosures, as those persons having authority and responsibility for planning, directing
and controlling the activities of the Company, including directors and management:
2016
$
2015
$
383,562
34,503
376,093
34,966
418,065
411,059
Premiums
82,609
88,437
Claims paid
16,165
11,067
Compensation
Salaries, benefits and director's fees
Total pension and other post-employment benefits
21.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
13. Capital Management
The Company's objectives with respect to capital management are to maintain a capital base that is structured to
exceed regulatory requirements and to best utilize capital allocations.
The regulators measure the financial strength of property and casualty insurers using a minimum capital test
(MCT). The regulators generally expect property and casualty companies to comply with capital adequacy
requirements. This test compares a Company's capital against the risk profile of the organization. The risk-based
capital adequacy framework assesses the risk of assets, policy liabilities and other exposures by applying
various factors. The regulator indicates that the Company should produce a minimum MCT of 150%. During
the year, the Company has consistently exceeded this minimum. The regulator has the authority to request more
extensive reporting and can place restrictions on the Company's operations if the Company falls below this
requirement and if deemed necessary. The MCT for the company at December 31, 2016 was 505% (517% at
December 31, 2015).
For the purpose of capital management, the Company has defined capital as policyholders' equity.
14. Financial Instrument and Insurance Risk Management
Insurance risk management
The principal risk the Company faces under insurance contracts is that the actual claims and benefit payments,
or the timing thereof, differ from expectations. This is influenced by the frequency of claims, severity of claims,
actual benefits paid and subsequent development of long-term claims. Therefore, the objective of the Company
is to ensure that sufficient reserves are available to cover these liabilities.
The above risk exposure is mitigated by diversification across a large portfolio of insurance. The variability of
risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as
the use of reinsurance arrangements.
The Company purchases reinsurance as part of its risks mitigation program. Retention limits for the excess-ofloss reinsurance vary by product line.
Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision
and are in accordance with the reinsurance contracts. Although the Company has reinsurance arrangements, it is
not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to ceded
insurance, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance
agreements.
The Company writes insurance primarily over a twelve month duration. The most significant risks arise through
high severity, low frequency events such as natural disasters or catastrophes. A concentration of risk may arise
from insurance contracts issued in a specific geographic location since all insurance contracts are written in
Ontario.
The Company manages this risk via its underwriting and reinsurance strategy within an overall risk management
framework. Exposures are limited by having documented underwriting limits and criteria. Pricing of property
and liability policies are based on assumptions in regard to trends and past experience, in an attempt to correctly
match policy revenue with exposed risk. Automobile premiums are subject to approval by the Financial
Services Commission of Ontario and therefore may result in a delay in adjusting the pricing to exposed risk; in
this case the Company has policies regarding renewal and new business accepted. Reinsurance is purchased to
mitigate the effect of the potential loss to the Company.
22.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
14. Financial Instrument and Insurance Risk Management (Continued)
The Company follows a policy of underwriting and reinsuring contracts of insurance which, in the main, limit
the liability of the Company to an amount on any one claim of $350,000 in the event of a property claim and an
amount of $400,000 in the event of an automobile or liability claim. The Company also obtained reinsurance
which limits the Company's liability to $1,050,000 in the event of a series of claims arising out of a single
occurrence. In addition, the Company has obtained stop loss reinsurance which limits the liability of all claims
in a specific year to 80% of net earned premiums.
The Company is exposed to a pricing risk to the extent that unearned premiums are insufficient to meet the
related future policy costs. Evaluation is performed regularly to estimate future claims costs, related expenses
and expected profit in relation to unearned premiums. There was no premium deficiency at December 31, 2016
and December 31, 2015.
The risks associated with insurance contracts are complex and subject to a number of variables which
complicate quantitative sensitivity analysis. The Company uses various techniques based on past claims
development experience to quantify these sensitivities. This includes indicators such as average claim cost,
amount of claims occurrence, expected loss ratios and claims development as described in note 7.
The table below sets out the concentration of unpaid claims and adjustment expenses by class of insurance:
Gross
Claims
$
Property
Liability
Automobile
December 31, 2016
Reinsurance
Net
Of Claims
Claims
$
$
Gross
Claims
$
December 31, 2015
Reinsurance
Of Claims
$
Net
Claims
$
3,666,427
6,447,473
14,278,949
1,447,087
3,085,243
8,076,020
2,219,340
3,362,230
6,202,929
2,871,106
6,461,978
21,227,486
972,874
2,914,918
16,638,612
1,898,232
3,547,060
4,588,874
24,392,849
12,608,350
11,784,499
30,560,570
20,526,404
10,034,166
Results of sensitivity testing based on expected loss ratios are as follows, shown gross and net of reinsurance as
impact on pre-tax income:
Property claims
2016
2015
$
$
5% increase in
loss ratios
Gross
Net
5% decrease in
loss ratios
Gross
Net
(
(
Auto claims
2016
2015
$
$
Liability claims
2016
2015
$
$
736,400
653,150
707,900
635,850
378,550
292,900
364,650
284,450
101,650
71,450
99,950
76,500
736,400) (
653,150) (
707,900) (
635,850) (
378,550) (
292,900) (
364,650) (
284,450) (
101,650) (
71,450) (
99,950)
76,500)
There have been no significant changes from the previous year in the exposure to risk or policies, procedures
and methods used to measure the risk.
23.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
14. Financial Instrument and Insurance Risk Management (Continued)
Credit risk
Credit risk is the risk of financial loss to the Company if a debtor fails to make payments of interest and
principal when due. The Company is exposed to this risk relating to its debt holdings in its investment portfolio
and the reliance on reinsurers to make payment when certain loss conditions are met.
The Company's investment policy puts limits on the bond portfolio including portfolio composition limits,
issuer type limits, bond quality limits, aggregate issuer limits and corporate sector limits. The bond portfolio
remains very high quality with 100% of the bonds rated A or better. All fixed income portfolios are measured
for performance on a quarterly basis and monitored by management on a monthly basis.
Reinsurance is placed with Farm Mutual Reinsurance Plan Inc. (FMRP), a Canadian registered reinsurer.
Management monitors the credit-worthiness of FMRP by reviewing their annual financial statements and
through ongoing communications. Reinsurance treaties are reviewed annually by management prior to renewal
of the reinsurance contract.
Amounts receivable are short-term in nature and are not subject to material credit risk.
The maximum exposure to credit risk and concentration of this risk is outlined in note 4.
There have been no significant changes from the previous period in the exposure to risk or policies, procedures
and methods used to measure the risk.
Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate as a result
of market factors. Market factors include three types of risk: currency risk, interest rate risk and equity risk.
The Company's investment policy operates within the guidelines of the Ontario Insurance Act. An investment
policy is in place and its application is monitored by management and the Board of Directors. Diversification
techniques are utilized to minimize risk. The policy limits the investment in any one corporate issuer to a
maximum of 5% of the company's total assets.
a) Currency risk
Currency risk relates to the company operating in different currencies and converting non-Canadian
earnings at different points in time at different foreign exchange levels when adverse changes in foreign
currency exchange rates occur.
The Company's foreign exchange risk is related to its stock holdings. The Company limits its holdings in
foreign equity to 20% of the equity portfolio in accordance with its investment policy. On December 31,
2016 and December 31, 2015 the company held no foreign currency investments.
There have been no significant changes from the previous period in the exposure to risk or policies,
procedures and methods used to measure the risk.
b) Interest rate risk
Interest rate risk is the potential for financial loss caused by fluctuations in fair value or future cash flows of
financial instruments because of changes in market interest rates.
24.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
14. Financial Instrument and Insurance Risk Management (Continued)
Market risk (continued)
b) Interest rate risk (continued)
The Company is exposed to this risk through its interest bearing investments, which include treasury bills,
guaranteed investment certificates and bonds.
Historical data and current information is used to profile the ultimate claims settlement pattern by class of
insurance, which is then used in a broad sense to develop an investment policy and strategy. However,
because a significant portion of the Company's assets relate to its capital rather than liabilities, the value of
its interest rate based assets exceeds its interest rate based liabilities. As a result, generally, the Company's
investment income will move with interest rates over the medium to long-term with short-term interest rate
fluctuations creating unrealized gains or losses in net income. There are no occurrences where interest
would be charged on liabilities; therefore, little protection is needed to ensure the fair market value of assets
will be offset by a similar change in liabilities due to an interest rate change.
The objective, policies and procedures for managing interest rate risk is to diversify the bond and
guaranteed investment portfolio in such a way that this portfolio is laddered over a period of five years. This
protects the Company from fluctuations in the interest rates.
Had prevailing interest rates of the Greystone Fixed Income Fund increased or decreased by 1.0%,
assuming a parallel shift in the yield curve and all other variables held constant, the market value of the
Fund's fixed income holdings would have decreased or increased by approximately 6.90%. The fixed
income holdings' sensitivity to interest rate fluctuations was estimated using the weighted average duration
of the fixed income holdings. In practice, actual results may differ from this sensitivity analysis and the
difference could be material.
There have been no significant changes from the previous period in the exposure to risk, nor any significant
changes to policies, procedures and methods used to measure the risk.
c) Equity risk
Equity risk is the uncertainty associated with the valuation of assets arising from changes in equity markets.
The Company is exposed to this risk through its equity holdings within its investment portfolio.
The company's portfolio includes Canadian stocks with fair values that move with the Toronto Stock
Exchange Composite Index. A 10% movement in the stock markets with all other variables held constant
would have an estimated effect on the fair values of the Company's Canadian common stocks of
approximately $330,000. These changes would be recognized in other comprehensive income or net income
depending on the classification of the instruments.
The impact on the Greystone Canadian Equity Fund holdings due to a 10% change in the benchmark
(S&P/TSX Equity Composite stock index), using a three year historical measure of the sensitivity of the
equity holdings' returns relative to the returns of the S&P/TSX Equity Composite stock index as of
December 31, 2016, with all other variables held constant, would result in an increase or decrease of
approximately 9.0% of the Fund's equity holdings. The Fund's historical sensitivity measure may not be
representative of its future sensitivity measure, and accordingly, the impact on net assets could be materially
different.
There have been no significant changes from the previous period in the exposure to risk, nor any changes to
the investment policies, procedures and processes for managing equity risk.
25.
EXPLANATORY FINANCIAL NOTES
YEAR ENDED DECEMBER 31, 2016
14. Financial Instrument and Insurance Risk Management (Continued)
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet all cash outflow obligations as they come
due. The Company mitigates this risk by monitoring cash activities and expected outflows. The Company's
current liabilities arise as claims are made. The Company does not have material liabilities that can be called
unexpectedly at the demand of a lender or client, nor does it have material commitments for capital expenditures
and there is no need for such expenditures in the normal course of business. Claim payments are funded by
current operating cash flow including investment income.
The company is a participating member of Farm Mutual Reinsurance Plan Inc. (FMRP) and, as such, may
become obligated to fund a capital call request from FMRP which would be recorded as a subordinated loan in
the company's accounts. Policies and procedures are in place to measure and control the risk to the company
should this capital call occur.
There have been no significant changes from the previous period in the exposure to risk, nor significant changes
in policies, procedures and methods used to measure the risk.
15. Retirement Benefits
The Company makes contributions on behalf of its employees to "the Retirement Annuity Plan for Employees
of the Ontario Mutual Insurance Association and Member Companies", which is a multi-employer plan. Eligible
employees participate in the defined benefit plan. The defined benefit plan specifies the amount of the
retirement benefit to be received by the employee based on the number of years the employee has contributed
and his/her final average earnings.
The Company matches the employee contributions and funds the excess defined benefit based on the Company's
percentage of pensionable earnings as calculated by the Pension Plan actuaries. The Pension Plan agreement
states that the Company is responsible for its share of any deficit as a result of any actuarial valuation or cost
certificate. In the event of a wind-up, voluntary withdrawal or bankruptcy, either by the Company or the group
as a whole, the Company is responsible for its portion of all expenses and deficit related to such.
During 2016, the amount contributed to the plan for current service was $178,830 ($179,157 in 2015) and the
amount contributed to the solvency funded status deficit was $369,666. These amounts have been recognized in
comprehensive income. The Company had a 3.0% share of the total contributions to the Plan in 2016. The
expected normal contribution to the Plan for 2017 is $240,000.
An actuarial valuation of the Pension Plan as of December 31, 2013 determined that the Plan was in a goingconcern surplus position on that date. The next actuarial valuation to be filed under the Pension Benefit Act will
be as of December 31, 2016.
16. Comparative Figures
Comparative figures have, in some instances, been restated in order to present them in a form comparable to
those for the current year.
26.